This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
The Canadian courts have imposed a strict regime on purchasing institutions that conduct their tendering processes under the Contract A process rules. As this discussion highlights, even relatively minor informalities, including mistakes in filling out forms or submitting alternative proposals, can be fatal to tender compliance and trigger lengthy lost profit lawsuits by losing bidders.
Part 1 – Minor Irregularities Lead to Major Lawsuits
During a formal Contract A bidding process, purchasers are typically under an implied duty to reject non-compliant tenders. There is no ability to safely correct those errors without incurring the risk of a lost profit bid-repair claim in these one-shot submission Contract A bidding processes. This implied duty prohibits the post-bid correction of material defects in a tender. While the practice of correcting tender defects is often justified as a “clarification” or “correction” exercise aimed at addressing “minor irregularities”, the following examples illustrate how these post-tendering activities can constitute bid repair and result in significant legal liabilities to the purchasing institution that has to defend against the allegations, irrespective of whether the court ultimately rules that the original bid error was major or minor.
$39 Million Deal Lost Due to Signing Protocols
In a Contract A tendering process, seemingly minor bid irregularities can prove fatal to bid compliance and attract lost profit claims by rejected bidders. In its May 2003 decision in Aquicon Construction Co. v. Vaughan (City), the Ontario Superior Court of Justice upheld the strict enforcement of the tendering rules and the rejection of the low bid. The case involved a tender call for the construction of a community centre. The low bidder lost a $39 million deal due to a technical irregularity in the rate bid form. The relevant tender call rule stated that “all strikeouts, erasures or overwriting must be initialled by an authorized person executing the bid.” The bidder’s president signed the bid form but did not attend the closing, sending instead another authorized representative. That other representative filled in some outstanding pricing information, amended one of the line-item numbers, adjusted the total price, and submitted the tender. It was the low bid. The City rejected the tender since the representative who made the final amendments was not listed on the bid form as an authorized person. The Court considered the bidder’s signing process and acknowledged that it fell within industry practices. However, the Court ultimately found that the specific tender call rules prevailed over any implied industry practices and decided that the municipality was within its rights when it rejected the tender.
This case shows how small details can have a big impact on the outcome of a bidding process and how a bidder’s non-compliance for even minor irregularities can compel bid rejection and result in high-risk lost profit lawsuits under the Contract A tendering model. While these types of errors could be easily correctible, the Contract A process rules do not permit the post-bid correction of any errors that originally rendered the bid non-compliant. At the same time, what constitutes non-compliance can only be determined retroactively once a process is challenged.
Obvious Errors Not Easily Corrected
In its March 2008 decision in Jarlian Construction Inc. v. Waterloo (City), the Ontario Divisional Court upheld a prior trial judgment, which found that the City of Waterloo had improperly accepted a non-compliant low bid. The case dealt with a mistake in the selected bidder’s rate bid form. The municipality had corrected an obvious error in the low bidder’s tender and awarded the construction contract to that bidder. A competing bidder sued. The Court concluded that the error made the low bid legally incapable of acceptance and that the municipality had accepted a non-compliant bid.
As this case illustrates, purchasing institutions should be careful to avoid engaging in post-tender bid repair. The correction of bid errors, particularly mistakes relating to price, can constitute a breach of the implied duty to reject non-compliant tenders, and attract lost profit claims under the Contract A rules. In this catch-22 situation, the purchasing institution can be sued for lost profits no matter what it does, since rejecting a bid can attract a lost profit claim from that bidder, while accepting a bid with an irregularity can attract a lost profit claim from the other bidders.
“Right Price, Wrong Form”, Bid Disqualified
In its May 2007 decision in Steelmac Ltd. v. Nova Scotia (Attorney General), the Nova Scotia Supreme Court also upheld the government’s decision to reject a low bidder’s tender for non-compliance. The case involved a tender call for the installation of concrete slab reinforcements for two high schools. The low bidder was rejected after it submitted the wrong tender submission forms with its bid. The bidder sued, arguing that its low bid should have been accepted. As the Court noted, the tender call prescribed the use of a “Bid Form” that contained the requisite legal representations necessary to create a legally binding bid. However, the Court found that the bidder mistakenly used a set of “RFQ” forms which were contained in the tender call for other administrative purposes and lacked the necessary legal formalities to create a binding bid. While the bidder maintained that the tender was substantially compliant notwithstanding the use of the RFQ forms, the Court disagreed, noting that the “commitments made by use of the ‘Bid Form’ are clear, unequivocal, and potentially enforceable.” The Court therefore concluded that “by using the RFQ forms to submit its two bids, Steelmac was not compliant with the tender instructions and therefore in the circumstances the Province was acting correctly when it rejected the two bids.”
As this case illustrates, paperwork errors in submitted documents can be fatal to tender compliance and can result in litigation. Had a transparent rectification process been permitted, something that is not possible under the strict Contract A tendering rules, the lawsuit could potentially have been avoided and a contract could potentially have been awarded to the best price.
Math Corrections Can Constitute Bid Repair
Similarly, in its May 2008 decision in Maystar General Contractors Inc. v. Town of Newmarket, the Ontario Superior Court of Justice found that the defendant municipality improperly corrected a mathematical error in a tender and held the municipality liable for awarding a contract to a non-compliant bidder. The case involved a tender call for the construction of a recreational facility. The plaintiff, Maystar General Contractors, was an unsuccessful bidder. It alleged that the contract was awarded to a non-compliant competing bidder. It sued for $3.3 million in lost profits. The City argued that the selected tender was compliant and that its mathematical corrections were permitted within the tendering rules. The Court disagreed, finding that the bid price in the selected tender was uncertain and that the post-bid “clarifications” and “corrections” amounted to improper bid repair. The Court concluded that the “clarification” process resulted in the improper post-bid alteration of the tender. The Ontario Court of Appeal subsequently upheld that decision.
Rejected Garbage Bid Leads to Lost Profit Claim
In its September 2012 decision in Glenview Iron & Metal Ltd. v. Smiths Falls (Town), the Ontario Superior Court of Justice granted a summary judgment against a lost profit claim brought by a non-compliant bidder. The dispute involved a municipal garbage removal contract that called for unit pricing for different-sized garbage containers. The bid form set out the size of each container category and the number of containers in each category. While the price form required bidders to bid the monthly unit price in each category, the low bidder multiplied its unit prices by the total number of units required in each category to arrive at a total monthly fee for each category. For example, instead of inserting $86 in a specific category, the low bidder multiplied the unit price by the required ten units in that category so that its bid price was $860 instead of $86. While this was an obvious error and the municipality was able to determine the intended amount for each unit and that those unit prices reflected the lowest bid, the Contract A bidding process rules did not permit the Town to make those corrections and accept the low bid. The low bid was rejected as non-compliant and the low bidder sued for lost profits. While the Court ultimately rejected the lost profit claim, this case serves as another example where the best bid was rejected for a relatively trivial and easily correctible error, since the Contract A rules do not allow for the post-bid rectification of errors due to the one-shot approach to bidding. In an area where bidder errors are endemic, a system with little tolerance for those errors that render any decisions surrounding bid validity subject to lost profit claims, has clear operational and practical drawbacks.
Blank Line Item Leads to Rejection of $31 Million Bid
In its February 2014 decision in Pomerleau Inc. v. Newfoundland and Labrador (Minister of the Department of Transportation and Works), the Newfoundland and Labrador Supreme Court dismissed a lost profit lawsuit brought by a disqualified low bidder. The dispute dealt with a Contract A tendering process for the construction of a new police building. The low bid was just over $31 million, which was approximately $1.5 million lower than the next-best bid. However, a line item in the low bid for monthly fees for elevator maintenance and service was blank. The project team was not sure what to do in that situation. The issue was ultimately escalated to senior officials and to the Premier’s office before a decision to reject the low bid was finally made. The low bidder sued for lost profits, arguing that the omission was relatively minor and that it should have been awarded the contract. The government was therefore placed in a position of defending a lost profit lawsuit after the Contract A rules forced it to reject the best price and spend significantly more money on another bid. While the Court ultimately upheld the government’s decision to reject the low bid, a flexible negotiated RFP process with rectification cure periods that protect the confidentiality of pricing information prior to the award of a contract would be a preferable approach to rejecting the best price, awarding to a higher bid, and then expending more time and resources in defending against the resulting lost profit claim.
“Right Price, Wrong Form”, Take Two
In its February 2014 decision in Newfoundland and Labrador v. Marine Contractors Ltd., the Newfoundland and Labrador Supreme Court determined that a disputed low bid was compliant and capable of acceptance after the government brought an application to court to determine whether it could award a contract to the low bidder. The dispute involved a tendering process for a sewer system upgrade project. The tender call set out different measurements for the removal of existing culverts. However, in numbering the items, the original bid form used a comma, rather than a period, which created potential confusion to the reader who could mistake “1, 600 mm dia.” to mean one thousand six hundred rather than six hundred, and “2, 900 dia.” to mean two thousand nine hundred rather than nine hundred. The bid form was amended to remove that numbering so that only the measurements remained. However, the low bidder, whose $4.5 million bid was $325,000 lower than the next-best bid, used the old form rather than the new form. The government was unsure whether it could waive this irregularity or whether that would constitute the acceptance of a non-compliant bid. Since, under the Contract A process rules, accepting the low bid would expose the government to a lost profit claim by the next-best bidder, and rejecting the low bid would expose the government to a lost profit claim by the low bidder, the government decided to proactively go to court for a ruling. The Court ultimately decided that the use of the older form was not a material omission since the only difference between the old and new form was the removal of the ambiguous numbering contained in the old form. The bid was therefore deemed capable of acceptance.
As this case illustrates, the inability to allow for the rectification of easily curable irregularities under the Contract A bidding process rules creates significant impracticalities in the government procurement process. The fact that the government found itself in a catch-22 situation, where it faced the risk of a potential lost profit claim irrespective of its compliance decision due to bidder errors it could not control, underscores the importance of phasing out Contract A bidding processes and replacing them with negotiated RFPs that contain clear and fair rules that allow for rectification cure periods and the confidential protection of bidder information during the evaluation and award stages of the bidding process.
Future Considerations on Compliance
As these cases illustrate, engaging in the post-bidding rectification of tender defects under the Contract A process contract rules can be a risky business practice. In fact, a purchasing institution is often forced to reject the best price and then incur even more expense in defending a lost profit claim against the rejected low bidder. In a classic Contract A catch-22 situation, every tender compliance assessment under Contract A is a potential lost profit claim. While rejected bidders can challenge their rejection with a lost profit claim, if the same bid is accepted, losing bidders can also challenge the outcome with their own lost profit claim and argue that the winning bid was non-compliant and improperly accepted. Purchasing institutions should therefore avoid Contract A bidding processes and implement flexible negotiated RFP formats that permit transparent rectifications of all bidder errors through two-stage submission processes that are transparently established within their solicitation rules and consistently applied in their bidding processes. Ultimately, giving all bidders a fair warning and opportunity to rectify errors so that the best submission can win on merit is a preferred approach to defending against lost profit lawsuits over easily correctible bid submission deficiencies.
Part 2 – Alternate Proposals Not Acceptable
In a Contract A bidding process, any condition, qualification, or out-of-scope proposal contained in a bid submission can constitute a counter-offer that renders the bid non-compliant and legally incapable of acceptance. While under traditional contract rules these irregularities could be cured or the alternatives accepted by the purchasing institution, under the one-shot Contract A rules, they could be retroactively deemed to be material changes in subsequent lost profit litigation. As these cases illustrate, this drives a highly rigid approach to tendering under the Contract A process rules, denying the opportunity to explore creative solutions, while also increasing litigation risks.
Conditional Pricing Deemed Non-Compliant
Bid conditions can be fatal to bid validity in a Contract A tendering process. For example, in its June 2000 decision in Inter-Rail Auto Handling Inc. (c.o.b. Inter-Rail Canada) v. Canadian Pacific Ltd., the British Columbia Supreme Court found that the inclusion of the condition of “based on completion of a satisfactory contract” in the bid form constituted a counter-offer that made that bid retroactively non-compliant, even though a contract had already been awarded to that bidder. While the contractor was years into performance, the Court determined that the inclusion of conditions in the original price form meant that there had been no meeting of the minds between the parties in the original Contract A bidding process, and that the contract terms that were originally contained in the tender call, which the parties had neglected to formally sign, did not apply to the contract. Since, as the Court determined, “no Contract A was formed by the submission of the plaintiff’s Proposal”, the Court ruled that the purchasing institution could not rely on the termination clause in the standard contract terms contained in the original tender call to give notice of termination. The Court then conducted its own implied terms analysis to determine what a reasonable notice period was to terminate the contract.
As this case illustrates, conditions inserted into Contract A documents can irretrievably undermine the validity of a bid offer with significant downstream consequences.
Conditional Bid Results in Lost Profit Award
In fact, undetected conditions inserted into bid documents can give rise to retroactive lost profit risks, as evidenced in the November 2004 decision of the Ontario Superior Court of Justice in Tectonic Infrastructure Inc. v. Middlesex Centre (Township). The municipality awarded a contract for the construction of sewage treatment infrastructure but did not notice that the selected bid contained qualifications regarding pricing. After making a public access request for the winning bid documents, a competing bidder sued the municipality for awarding to a non-compliant bid. While the municipality argued that the selected bid was substantially compliant and that the pricing insertions were minor, the Court disagreed and awarded $554,000 in lost profit damages to the competing bidder.
Alternate Proposal Deemed Non-Compliant
Under the Contract A rules, the submission of proposed alternative performance terms can be fatal to bid validity and compel the rejection of an otherwise viable bid, even if those proposed differences may be relatively minor in the context of the overall project. For example, in its July 2006 decision in R. Litz & Sons Co. v. Manitoba Hydro, the Manitoba Court of Queen’s Bench considered the issue of tender compliance in a case dealing with three Manitoba Hydro tender calls for heavy equipment contractors. The dispute dealt with the rejection of all three tenders submitted by the plaintiff bidder. In all three instances, the Court found that these proposed alternatives constituted counter-offers that rendered the tenders non-compliant. For example, the low bidder proposed a 60-ton crane instead of a 65-ton crane for the required work. Manitoba Hydro’s decision to reject the tenders was therefore upheld and the bidder’s action was dismissed. While the decision to reject the bids was ultimately upheld in litigation, the question remains as to whether accepting the lower bids by scoring for the proposed adjustments to the performance methods could have resulted in better value in those bidding processes; however, the Contract A low bid rules used in that tendering process did not permit that possibility, but instead compelled the disqualification of the low bids and triggered the resulting lost profit lawsuit.
No Room for Safe Dialogue in Contract A
Similarly, in its December 1995 decision in Altoba Development Ltd. v. SaskPower, the Saskatchewan Court of Queen’s Bench upheld the purchaser’s decision to reject the plaintiff bidder’s tender once it became apparent that the bidder did not intend to perform the dam repair contract in accordance with the specifications set out in the tender call. The bidder’s failure to accept the tender call terms proved fatal to the compliance of its tender and to its subsequent legal challenge. The Contract A tendering system rules did not permit the parties to explore different performance methods, even if those alternatives could be improvements in the overall project approach. Instead, potential dialogue between the parties was replaced with litigation in the defence of a lost profit damages claim.
Letter of Credit Amendment Fatal to Bid Validity
In its May 2009 decision in Thales Rail Signalling Solutions v. Toronto Transit Commission, the Ontario Superior Court of Justice dismissed an injunction application brought by a rejected bidder. The dispute involved an RFP for an automatic train control system. The bidder’s bank made modifications to the prescribed letter of credit form that was required under the RFP rules. Instead of stating that the undersigned “hereby agree to become bound” the bank amended this to read that the undersigned “hereby express that, under current conditions and our current expectations, we envision being in a position to issue” the required letter for credit. Under the Contract A bidding rules, that wording change proved to be an incurable and fatal defect to the proposal, since that amendment could not be repaired after the bid submission deadline, and instead triggered a legal challenge by the rejected bidder.
Creative Proposals That Save Time and Money Not Allowed Under Contract A
In fact, even if a creative alternative proposal could save the purchasing institution significant time and money, the Contract A process rules do not permit the acceptance of that proposal. In its November 1984 decision in Ben Bruinsma & Sons Ltd. v. Chatham (City), the Ontario High Court of Justice granted an injunction to stop the award of a contract to an alternate proposal under a Contract A bidding process. The dispute involved a soccer field sodding and seeding contract. One of the bidders proposed an approach that would remove the need for one of the phases of the project, thereby reducing the overall cost and accelerating the performance time. However, a competing bidder challenged this process, arguing that it should have been given the opportunity to bid on the rescoped work. The Court found that the Contract A rules did not allow the City to alter the terms of the tendered contract before awarding that contract. It therefore granted an injunction to stop the contract award.
As this case illustrates, the Contract A rules impose significant restrictions on innovative proposals. Proponents who may have better solutions to propose run the risk of being disqualified for offering ideas that will save time and money. In those situations, using negotiated RFPs, where the rules can be framed to reward innovation rather than penalizing innovation, would be a better ultimate result for purchasing institutions.
